Still No One Shopping

The long-moribund economy may be showing some signs of life, but retail remains a disaster.

With unemployment above 9%, and set to rise, expect consumers to keep their wallets shut a while longer. Analysts predict another dour month when big chains report their August sales figures Thursday.

"As long as the consumer has no job growth and no income growth, he [effectively] has a salary cut," says Howard Davidowitz, chairman of Davidowitz & Associates, a New York-based industry consultant and investment bank. He figures that while lower gas prices and various sales tax holidays in several states could make August "a tad better" than July, it still figures to be a tough month. Especially with this year's late Labor Day (Sept. 7), pushing some back-to-school sales into September.

Major department stores will keep absorbing most of the pain, according to Deutsche Bank retail analyst Bill Dreher, who is forecasting a 3.1% decline in same-store sales. He's pegging a 10% decline for
Dillard's
and 7% drops for both
Macy's
and
J.C. Penney
, as consumers continue to seek out bargains at discount stores. The silver lining: Both Macy's (-8%) and Penney (-14%) had even worse year-over-year comp sales in July.

"Overall, sales trends appear to be stabilizing at low levels," Dreher said in a recent research note.

Drug-store chains, where growth in prescription revenue offset weakness in front-end sales, could do better. Dreher predicts 3.5% growth for
Walgreen
over last year. Still, year-over-year growth for drug chains is shaping up to be about half of what it was from 2007-2008.

The industry is better prepared than it was a year ago, though. Macy's, J.C. Penney and other chains reduced inventories and closed underperforming stores, cutting down on clearance sales to get merchandise out the door. Many have also put off remodeling stores, hording cash instead. But the problem, as Davidowitz notes, is that such steps are more effective as short-term band-aids than as sustainable strategies. Eventually, you need to get customers back in the door. "The next step is being forced to use robots in the stores," he jokes.

Going forward, the health of various retailers could largely come down to which ones win the battle of what Dreher calls the "up for grabs" market, those potential sales left on the table during an industry consolidation that's put several major chains out of business. Dreher estimates the annualized "up for grabs" market at $21 billion, led by $2.5 billion from Mervyn's, $726 million from Goody's and $657 million from Steve & Barry's.

Davidowitz predicts most of that dough will go to those chains he rates as best in class: department store
Kohl's
, specialty chain
Bed Bath & Beyond
(benefiting from Linens 'N Things downfall) and high-end jeweler
Tiffany
.

"We've closed about 2,000 jewelry shops, which will help Tiffany ride out the storm," Davidowitz says. For most others, the clouds continue as far as the eye can see.